New Fund to Protect against MF Global-type Failures

A new $100 million fund will provide a small measure of security to hedge practices.

In response to the devastating MF Global bankruptcy in October 2011, the CME Group announced Feb. 2 that it will establish a $100 million fund designed to provide further protection of customer segregated funds for farmers and ranchers who hedge their sales using CME Group futures markets.

When a unit of New York-based MF Global reported a $1.2 billion shortfall in its customer-segregated accounts, government regulators forced the firm into bankruptcy. The fall of MF Global ranks as the nation’s eighth-largest corporate failure. According to recent news reports, most of the funds in question have now been accounted for, but whether they can be recovered is uncertain. The firm is accused of violating Commodity Futures Trading Commission (CFTC) regulations and mishandling client money.

Brokerage firms like MF Global are supposed to keep customer money separate from company money. That way, if the brokerage firm runs into financial trouble, customers are protected. Using client money to meet a company's financial needs could violate civil securities laws and result in criminal charges.

The new CME fund, called the Family Farmer and Rancher Protection Fund, is expected to be in place by March 1, 2012. Farmers and ranchers who use CME futures to hedge their products will be eligible for up to $25,000 per account in the event that losses result from the future insolvency of a clearinghouse. Farming and ranching cooperatives will be eligible for up to $100,000 each.

"It’s a step in the right direction, but it’s puzzling that it omits country elevators," says Dianna Klemme, vice president with Grain Service Corporation, Atlanta. "Hopefully, the fund won’t be needed, and hopefully much needed (regulatory) changes will be in effect soon." Klemme is a member of a National Grain and Feed Association task force that is developing potential regulatory proposals that could help prevent another MF Global situation from occurring. Other task forces are looking into the issue as well, she says.

"The fund is a first step and very targeted to family farmers, ranchers, and cooperatives," says Laurie Bischel, director of corporate marketing and communications, CME Group. "We realize other solutions are needed."

In Terms of Bushels. The $25,000 safeguard provided by the new recovery fund equates to a futures hedge on about 50,0000 bushels of corn plus enough money to cover margin calls. Yet many growers place hedges on substantially more production, and many producers had considered their segregated brokerage accounts a safe place to park money.

"There were people who honestly believed that having money in a client segregated account was safer than having it in a bank," Klemme says. Some producers had $100,000 or more in their MF Global accounts.

In the event that losses resulting from a future failure of a clearinghouse exceed $100 million, the fund would provide farmers and ranchers who sustained losses a pro-rata share of the new CME fund.

This new fund will not be available retroactively, and thus will not cover losses sustained by victims of the MF Global bankruptcy. "Many have been hurt by MF Global’s bankruptcy," CME Group Executive Chair Terry Duffy said in a press release. "Though all the facts are not yet in, we do know our industry needs to focus on enhancing protections for customer segregated monies held at the firm level."